Understanding Your Cost to Company: What It Really Means for Your Take-Home Pay

                                             Image by Rupixen from Pixabay

Have you ever heard from any of your friends or experienced yourself that the package shown on offer letter is a higher number and when you receive salary, boom - You're taken aback!

When you receive your offer letter, the figure which is shown on offer letter and usually looked at by the receiver is Cost To Company or Total Package Cost. If you'll simply divide this figure by 12 and consider that number as your monthly take home, then be prepared for some surprises.

For example, if Sandeep received an offer for INR 8,40,000  CTC and if he assumes that he will receive  INR 70,000 per month. Once he joins and receives his salary - his expression will be like

                                            Image by Usman Yousaf from Pixabay

So, what exactly should have Sandeep considered?

First, let us put things in perspective: Cost To Company, is the annual cost incurred by a company to employ Sandeep. Few companies include additional overheads which they incur - for example Insurance, cost of relocation etc., and might show an inflated figure than the take home salary.

Few companies do adopt a policy of, What You See Is What You Get, but, even then there is a catch. More often than not, employers show their part of Provident Fund Contribution and Gratuity which is paid at the time of exit / retirement provided certain conditions are met with respect to tenure. 

So, which components do you need to Exclude from his offer letter, to arrive at approximate monthly take home:

1. Company's contribution to Provident Fund. Employee's contribution to PF comes from their own salary - So an identical contribution as that of Employer will be deducted from your monthly take home. Do note that, if you decide to contribute additional money, to your PF account, often called as 'Voluntary Provident Fund' (VPF) employer is not obliged to match.
2. Gratuity
3. Professional Tax (apx INR 200 per month)
4. Income Tax (depending upon tax bracket)
5. If a company has any welfare fund (an amount of INR 50 to 500 per month might be deducted through payroll)
6. If Medical insurance / Insurance premiums are shown as part of package
7. If Relocation assistance package is shown as part of package
8. If Variable pay is shown as part of package - This is paid on an agreed time frame usually Quarterly / Annually and payout is dependent upon company / employee performance
9. If Transportation benefit is shown as part of package
10. If your company provides for NPS or Superannuation program and you opt for the same
11. Labour Welfare Fund charges - Most states in India charges a nominal sum and this contribution varies by State. This may be deducted Monthly / Quarterly / Annually etc. depending upon the state you work. For example, fund charges for someone working Karnataka are INR 20 per annum for employee
12. Some companies offer Insurance only to Employees. If employee decides to cover their family under insurance plan, they might have to shell out additional cash from their salary
13. Sign-on bonus or Joining Bonus if shown as part of package - please read more information, if its one time amount or monthly amount.
14. If Equity in terms of Restricted Stock Units (RSUs) or Employee Stock Options (ESOPs) are shown as part of Total package - understand that, these are usually converted into shares provided you meet certain conditions

Once you exclude above components, it is safe to assume you can arrive at an approximate value of your monthly take home. This further depends upon certain factors like the Income Tax Regime you choose or if you opt for a company leased car / loan etc.,

Please remember, do not get fooled by the inflationary number that you see on offer letters. Take time to understand about the components. Feel free to ask questions to your Hiring manager / Recruiter/ HR. Most importantly, consider, why do you want to join a particular company? At times, joining a company which offers relatively lesser package might seem a bad deal, but, do understand roles and responsibilities of the job being offered, work culture of the company and opportunities to have great mentors. At the start of your career, those are more valuable than a few extra thousands.

Do share your comments or experiences.

Until later!

National Pension System - An effective way to save tax and compound money!

Let me begin this article by citing a Jewish proverb - 'Taxes grow without rain!'. Income Tax is the most dreaded and probably the most hated word even for those who are patriotic. Especially in countries like India, there is often a social dilemma, whether, the tax money collected is efficiently utilised? That's a separate discussion. Remaining within the Legal boundaries, can you reduce the impact of Income Tax?

Yes. Thankfully yes. To make this sound more interesting, let's crunch some numbers:

Let's say, Sandeep starts working at the age of 25. The organisation he joins offers him NPS as one of the Compensation item, where he could opt to contribute INR 100,000 per annum through Employer. But, he chooses not to. His Employer deducts, INR 30,000 as tax (assuming at 30% tax).

So Sandeep receives INR 70,000 post tax and this money he has to invest in certain other products (Gold, FD, Real estate etc.,) to create wealth.

In Economics, there is always a trade-off to your decisions. Is there something which Sandeep is foregoing, with this decision of taking a 30% cut.

With three assumptions let's looks at what these 30,000 per annum chunks would have turned into

1. Sandeep would have retired at 60
2. Yearly contribution through Employer for the remaining 35 yrs kept at INR 100,000
3. Assuming 8% return on INR 30,000 chunks 
   

Amazing isn't it! The amount saved if otherwise would have been paid as taxes would have grown to INR 52 Lakhs! The corpus which Sandeep could have built is INR 41 Lakhs!

Let us also look at, what % of return is needed to match NPS returns, if Sandeep would have invested in Equity Mutual Funds. Post Tax, Sandeep is left with INR 70,000. Let us compare this with an Annual investment of INR 100,000 over a period of 35 years.

Above picture shows an investment of INR 70,000 made every year over a period of 35 years in a Mutual Fund. Gains on Equity mutual funds, currently are taxed at 10% on profit above INR 1 Lakh.

Now let's compare this with investment made in NPS. Remember in NPS, subscriber has an option to allocate up to 75% of their contribution towards Equity. Remaining 25% of the contribution let's say is invested in Corporate Bonds / Government Securities.

1. Assuming the Equity portion i.e 75% of the contribution mimics the gain of Equity mutual fund

2. Assuming the other 25% of the contribution grows at 8%

The above table depicts the returns which Sandeep will be able to generate - Tax free, if he opts for NPS. Even if your Equity Mutual Fund generates a return of 15% per annum, even then it won't be able to match NPS over a long period of time.

So, don't be in a hurry to invest your money. Think well before you make any investment.

Credits: https://www.rapidtables.com/calc/finance/compound-interest-calculator.html

Disclaimer: The income tax rates / assumptions are taken at current rates / ease of calculation purposes. Please treat this as an awareness post but not as any advise. 

I have not considered inflation, expense ratios etc.,

So with that, I will try and write a few more posts on the advantages of NPS

Until my next post!

What is Term Insurance and why do you need a Term Insurance?

 

More often than not, when I meet someone and ask them, do you have a Term Insurance? They are either not aware or they state various reasons which are silly for not having one. The word death is a taboo in India but good news is that, we are not alone, in fact, Steve Jobs, in his famous Stanford commencement speech, said that, "even people who want to go to heaven are afraid of death". Now then, its clear that, we are all perishable. The logical thing to do is to think of a meaningful step, which can create a cushion of comfort for your family, when you are no more.

What is Term Insurance?

Simply put you are insuring yourself for a term (of lets say 12 months / 6 months) against the universal truth - death. In case the eventuality occurs, you'll leave behind your family or nominees a lump sum which can help them meet financial obligations for a few years.

When should you buy Term Insurance?

The moment you get your first salary - you'll actually be doing your family a favour by taking a policy. Remember, all of us are perishable.  Insurance companies, put a value on our life, depending upon the probability that we might die basis on age, life habits, health, income, nature of job etc.,  and quote a premium to insure your life for a period of one year. The longer your life expectancy, the lesser the premium.

Why should I take it early?

Simple Economics. The younger you are, health and age are on your side.  These two play an important role in determining the premium. Check the image below (which I have just used an illustration). These figures are obtained from policybazaar.com

As you can see, the longer you wait, the more premium you'll have to pay for the same amount of sum assured. Another factor to consider is that, once the premium is fixed, it remains the same (excluding any GST fluctuations) throughout the term. For example, if someone purchases a term-insurance policy at the age of 21 say from Tata AIA they may get it INR 6,667; they continue to pay the same premium even at the age of 40.

Aggregators provide such illustrations based on certain assumptions like you're healthy, non-smoker etc., The premium rates might increase, if you're under medication, have a lifelong illness, smoker etc.,  In certain conditions, the policy could be denied as well!

Why Term Insurance?

It creates a safety net for your family and you can have peace of mind. Before you begin your investment journey - remember that, wealth creation and career are like marathons. You need to conserve your energy every bit. Term Insurance unlike other insurance products is aimed at purely covering the risk of death. You can't create wealth if the purpose of product is defeated if part of your premium is invested in markets, which (Investment) by and large you can do yourself with some self study and help. Since these are pure products, the premium is usually lower than money back policy.

Also, Term Insurance pays a large amount as a lump sum. This can help your family maintain same life style even when their bread winner is no more. A pure product which pays a lump sum when the bread winner is no more is the most ideal one to pick.

Tax Benefits

Currently u/s 80(C) of IT Act, you can save tax up to INR 1,50,000 per annum

Important points to consider

1. Disclose all the details including  habits, present or past medical history etc., to insurer accurately. To decrease premium don't hide/suppress any facts.  Remember if the policy is triggered, simple means you are no more - in such a case if its found that, at the time of policy issuance, material facts were suppressed; it may lead to cancellation of policy. Sadly, you can't come back to respond to any queries!!
2. Nomination is important. Especially post marriage, update your nomination without fail
3. Check the financial stability of the company. Check the claim settled ratio. The higher the better.
4. Keep the policy document safe
5. Inform about this policy to one or two close friends and Spouse
6. Don't discontinue the policy. Make it a habit to keep the policy in force.

Until my later post! 

Picture Credits:

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Disclaimer: All views are personal. I am not endorsing any life insurance company through this post. Please contact your financial advisor for any advise.